Reference no: EM133398789

Morgan Grenfell asset Mismanagement

Morgan Grenfell Asset Management (MGAM) was doing well in 1994. Pension assets managed by the company's Investment Services division had grown from $7.6 billion to $10 billion during 1994. The firm was fast developing a reputation for being knowledgeable and effective. In 1995, however, one of its employees embarked on a course of action that would culminate in a media spectacle big enough to overshadow those successes. Sometime during that year, fund manager Peter Young began making covert purchases of large quantities of stock in companies that could charitably be described as little known. What Young saw in these companies was known only to himself; some of them were very unlikely to have been endorsed by MGAM's investment guidelines. One example was Solv-Ex, a company described by Barron's as having "a rather checkered past and nothing more tangible than ambitious plans for exploiting Canada's Athabasca tar sands for oil and minerals" (4 November 1996).

Young bought $30 million of stock in this gem-not at a discount, as might be expected for an extremely risky bulk purchase, but at a $2-a-share premium. Young also managed to circumvent a Securities and Investment Board regulation forbidding a fund from owning more than 10 percent of any company. He did this by establishing a system of companies, apparently through a Swiss law firm. These companies were paired so that each owned some 90 to 95 percent of its partner company, while Young purchased the other 5 to 10 percent for the funds under his control. In September 1996, the London regulators began investigating the valuation of assets in MGAM's three largest European funds. Trading on the funds shut down for three days and resumed only after Deutsche Bank, the parent company, replaced the questionable assets in the fund with $300 million in cash. Nonetheless, about 30 percent of investors left the funds within the next few weeks, taking $400 million with them. The turmoil in the wake of this scandal was enormous. MGAM had to compensate more than 80,000 investors and was fined by the City of London regulators.

Establishing the value of the compensation required two teams, each with 100 members, from two major accounting firms. Questions about how Young had been allowed to get away with his eccentric trading for so long-especially given reports that he had been cautioned about breaching investment guidelines months before the suspension-continued to haunt MGAM. Young, meanwhile, briefly returned to the limelight a few months later, when he made his first court appearance wearing a dress and full make-up. Whatever the motivation behind this switch in gender polarity, it served as a suitably surreal coda to an affair that had been as perplexing as it had been expensive.

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